Council Perspectives TM

Insights from The Conference Board Asia-Pacific Supply Chain Council

Supply Chain Benchmarking

Process and Methodology
by Vipin Suri

Supply chain operations within an organization should be constantly reviewed

to identify where improvements can be made. One method is to perform a series
of benchmarking tests for price, quality, design, efficiency, and cost effectiveness.

In general, companies perform two types of benchmarking: Getting Started

results benchmarking, which focuses on quantitative performance
measures, and best practices benchmarking, which focuses on
how well processes are executed. The results of both styles of
benchmarking are best used together because results bench-
marking only provides a basis for ranking a company, not a
strategy to improve its performance. Successful supply chain
benchmarking incorporates all of the elements in the global
supply chain and focuses on product specifications, operational
performance, management practices, and software solutions.
Although supply chain benchmarking involves three major
elements—the supplier, the distributor, and the interface of the
two—customer satisfaction should be the primary motivation
for establishing a benchmarking program.
In addition to their efforts to establish resilient operations,
supply chain professionals strive to be cost competitive.
Successful supply chain benchmarking can help them achieve
both goals. When used in conjunction with improvement
initiatives, benchmarking offers a performance measurement
tool that can measure companies’ comparative operating
performance, identify best practices and possible improvements,
and determine how a business is performing against its potential.
Benchmarks can also help businesses assess a variety of costs—
the cost of goods, the cost of doing business (including inbound
and outbound logistics), and opportunity costs. (For additional
advantages of benchmarking, see “Benefits of Successful
Benchmarking” on page 2.)

CP-021 2010
But where should companies begin? Previously created bench-
marking data—whether quantitative (performance-based) or
qualitative (best practice)—can provide a good starting point.
Consulting and research firms or other benchmarking service
providers can be used to undertake competitive benchmarking
projects that identify the strengths and weaknesses of processes
used by competing firms within an industry. For companies
that have performed internal benchmarking and want to
investigate new ways to improve the performance of their
internal processes, external benchmarking can produce
significant improvements and identify benchmarking peers
in other industries.
Defining the Scope of
Supply Chain Benchmarking
A company can have multiple supply chains operating within
its global supply chain.1 Organizations should therefore think
at the metric level and identify the products, channels, and
geographies for which data can reasonably be combined.
(For a step-by-step process for results benchmarking, see
“A Step-by-Step Process for the Quantitative Comparison
of Supply Chain Metrics.”)

Benefits of Successful Benchmarking A Step-by-Step Process for

In addition to providing useful comparisons with other the Quantitative Comparison
companies, supply chain benchmarking can identify: of Supply Chain Metrics
• performance improvements 1. Determine the scope of the inquiry (e.g., planning,
procurement, manufacturing, and logistics)
• interdependencies and relationships between
key performance indicators (KPIs) 2. Select a set of supply chain KPIs to measure
and compare
• better business tradeoffs
3. Identify a peer group of companies
• opportunities for cross-industry best practices
4. Agree on measurements and targets that can
• baseline information for goal setting, prioritization, reach the site and process levels
and ongoing performance measurements
5. Develop reporting templates and determine the
timing of measurement (e.g., daily, weekly, etc.)

6. Plan the implementation approach

7. Obtain stakeholder buy-in for benchmarking

and its benefits

8. Identify tools and resources for data collection

9. Collect and validate data

10. Analyze and interpret results

11. Develop an action plan

12. Track execution of actions

1 For benchmarking purposes, supply chains for make-to-stock and make-to-

order product lines should be separated because of differences in inventory
management.

2 council perspectives s u p p ly c h a i n b e n c h m a r k i n g : p r o c es s a n d m e t h o d o lo gy t h e c o n fe r e n c e b o a r d
Supply chain KPIs Procurement (sourcing strategy development, supplier
Metrics are an important component of qualitative best selection and contract management, order management,
practices. Executives can use performance metrics to perform and supplier appraisal and development) Examples of KPIs
gap analyses and identify areas needing improvement. benchmarked for procurement include total cost of the procure-
Two general types of supply chain KPIs⎯customer facing (e.g., ment cycle per purchase order or per $1,000 in purchases,
on-time delivery) and internal (e.g., inventory carrying costs) rate of annual raw material inventory turns, average supplier
⎯allow companies to benchmark on several levels. More lead time in days, days payable, number of FTEs for the
specifically, supply chain management KPIs should include: procurement cycle per $1 billion in purchases, and the
percentage of purchases made via an electronic marketplace.
Delivery performance metrics On-time delivery, performance
to commit, fill rate, and return rates.
Manufacturing (production scheduling, production, and
Cycle-time metrics Promised lead time, actual lead time,
performing maintenance) Common manufacturing KPIs
and supply chain cycle time.
include finished product first-pass yield (FPY), percentage
Inventory and cash management metrics Inventory of defective parts per million (DPMO), and scrap and rework
days of supply, days sales outstanding, days payables
costs as a percentage of sales and quantities shipped per
outstanding, and cash-to-cash conversion.
employee. Other KPIs benchmarked for product manufacturing
Supply chain cost metrics Overall supply chain costs, are manufacturing cycle time, actual production rate as a
order management costs, inventory carrying costs, supply percentage of maximum capable production rate, annual
chain finance and planning costs, supply chain IT costs,
work-in-process (WIP) inventory turn rate, unplanned machine
procurement department staffing, and savings.
downtime as a percentage of scheduled run time, warranty costs
Specific benchmark data gained through these metrics are (i.e., repair and replacement) as a percentage of sales, and
focused on the identification of key capabilities to enable labor turnover rate as a percentage of the workforce.
an integrated demand-supply network (IDSN).2
Logistics (logistics strategy, planning for inbound material
flow, warehousing, outbound transportation, and managing
Supply chain benchmarks of standard processes returns and reverse logistics) Standard KPIs for product
Another way to approach supply chain benchmarking is to delivery include order fill rate, pick-to-ship cycle times for
look deeper into traditional supply chain processes. customer orders, total cost of outbound transportation process
per $1,000 in revenue, number of FTEs required to operate out-
Planning (demand management, materials planning, and bound transportation per $1 billion in revenue, the percentage
production scheduling) Many planning KPIs are available, of sales order line items not fulfilled due to stock-outs, the
but companies must determine the indicators that are truly percentage of full-load trailer/container capacity used per
important to their organizations’ operational performance. shipment, and the percentage of orders expedited. Examples
Examples include cash-to-cash cycle time, inventory carrying of KPIs for logistics/warehousing as a whole include total
costs, days inventory outstanding, finished goods inventory logistics costs as a percentage of revenue, freight costs as
turn rate, cost of goods sold as a percentage of revenue, a percentage of revenue, the percentage of sales orders
forecast accuracy, number of full-time equivalents (FTEs) for delivered on time, the number of FTEs for the logistics
the supply chain planning function per $1 billion in revenue, function per $1 billion in revenue, and the ratio of premium
production schedule adherence, total expediting of costs to freight charges to total freight charges.
execute the production plan, value-added productivity per
employee, and return on assets.

2 Key capabilities should be defined in five categories: process, organization,

knowledge, technology, and performance measurement.

3 council perspectives s u p p ly c h a i n b e n c h m a r k i n g : p r o c es s a n d m e t h o d o lo gy t h e c o n fe r e n c e b o a r d
 The Perfect Order Index
In order to measure and benchmark on-time delivery, fill rates, and quality and customer satisfaction through
a single KPI, many companies use a perfect order index.a The perfect order index is a composite number that
measures the following components:

Delivered on time The percentage of orders that Shipped damage-free The percentage of customer
arrive at their final destination at the agreed-upon orders shipped in good and usable condition.
time between the customer and the shipper.
Correct documentation The percentage of
Shipped complete The percentage of orders total orders for which the customer received an
shipped with all lines and units. accurate invoice and other required documents.

The perfect order index is calculated by multiplying the percentage scores for these components. If a company
has a 95 percent score for each of the four components, for example, then the perfect order index would be:
0.95 X 0.95 X 0.95 X 0.95 = 81.5 percent.
a For more information, see Kate Vitasek and Karl Manrodt, “Perfect Order Report,” which is available on the Supply Chain Digest website
(www.scdigest.com).

Identifying the Benchmarking Peer Group
It is important to know a company’s processes and its level
of performance thoroughly before a benchmarking visit. The
benchmarking team should also be clear about what it wants to
learn before approaching a potential benchmarking peer group.
(After all, the benchmarking peer group members are expecting
to receive similar information in return.) Both parties should
understand and agree on the expectations of the benchmarking
peer group, how the information that is gathered will be treated,
who will have access to the data, and how the data will be used.
The importance of the data coordinator
A data coordinator should run the data collection effort.
Responsibilities for this position include pulling the neces-
sary people together, defining tasks, and conducting analyses.
Having the right coordinator is critical. The coordinator
should be someone with influence in the company and the
respect of his or her peers. In order to collect the right data
and validate its accuracy, the coordinator should have a
thorough understanding of the supply chain function.

Because achieving and maintaining customer satisfaction Improving Performance

are always the ultimate objectives, best performers are those
firms that have higher levels of performance in terms of their
customer-facing process capabilities than organizations that meet
the industry average or laggard companies (i.e., benchmarked
companies that fall in the bottom half of the results pool).
Capabilities used to determine high performers include the
ability to accurately forecast demand across multiple channels
and tiers, obtain timely access to supply chain partners’ data,
and integrate trading partner data into internal processes.
Best-in-class companies also involve suppliers and customers
in the sales and operations planning (S&OP) process and
use customer feedback to ensure a more accurate match of
demand and supply. These companies also collaborate with
suppliers on inventory management levels and on invoice
reconciliation to improve invoice and payment processes.
After the data is collected, the most difficult step remains—
converting the data into an action plan. Data transparency
and comparative analysis often result in change management
issues that should be managed with great care. Different
people will have different interpretations of the numbers,
and there may be some organizational resistance to change.
A structured approach should be used to coordinate the action
plan effort and ensure a meaningful outcome. The focus
should be on relationships between the metrics rather than
the comparison of individual KPIs to benchmark numbers
(e.g., trade-offs between cost and service levels). There
should also be discussions with the peer group members
about how to fix any issues.

4 council perspectives s u p p ly c h a i n b e n c h m a r k i n g : p r o c es s a n d m e t h o d o lo gy t h e c o n fe r e n c e b o a r d
 Three Categories to Consider
In order to succeed in benchmarking projects and avoid costly mistakes,
companies need to benchmark what is comparable, create strong change
management plans, and ensure they are in strict compliance with antitrust
rules and other commitments.

Key
Just benchmark what is comparable
Comparability Make it comparable (harmonize)
Clarify expectations of participants
at an early stage (scope)
Give and take
Extensive reporting with customized
results & database

Success Vital
Compliance Change

It is not about blaming (someone/ Keep strict compliance, with antitrust

a unit). It is about learning. rules being the overriding principle
Generate an open mindset and Formal legal documentation
a learning organization Strict anonymization of results
Minimum number of participants required

Source: Ralf Busche, director, supply chain Asia Pacific, BASF

Benchmarking Pitfalls Not defining clear roles and responsibilities The absence
There are any number of ways benchmarking projects can of an executive sponsor and a data coordinator can result in data
go wrong. Here are some of the most common mistakes. access difficulties, defensiveness, blame, and incorrect metrics.

Confusing benchmarking with participating in a survey Not establishing the baseline The effectiveness of
A survey of organizations in a similar industry is not really benchmarking efforts is hampered when the details, costs,
benchmarking because a survey cannot reveal what is behind and performance levels of all of the company’s processes
the numbers. are not known.

Developing action plans based on preexisting
“benchmarks” Numbers available from a survey may
simply not be applicable to all companies.
Forgetting about service delivery and customer
satisfaction A narrow focus on cost benchmarks at the
expense of service delivery and customer satisfaction
data will not provide the full story.
Trying to benchmark at too high or too granular a level
For the supply chain data to be meaningful, the scope of the
benchmarking project must be well defined.
Not aligning with business goals For benchmarking to be
effective, it must be aligned with the ultimate goal of improving
the end-to-end performance of supply chain operations.
Difficulty putting the data to work A simple comparison of
company metrics with benchmark numbers that does not take
the relationships between the two sets into account can make
it difficult to turn results into actionable projects.
A Final Word
Supply chains, which are a critical determinant of a com-
pany’s competitiveness, are incredibly difficult to manage
because they cross functional, enterprise, geographic, and
political boundaries. To set appropriate goals and identify
best practices, an individual company’s supply chains should
be understood and compared with those of industry peers and
best-in-class organizations. Through this process, companies
can gain greater understanding of the very latest systems and
practices that are crucial for improving the management of
their own supply chains.

5 council perspectives s u p p ly c h a i n b e n c h m a r k i n g : p r o c es s a n d m e t h o d o lo gy t h e c o n fe r e n c e b o a r d
About the Author
Vipin Suri is program director for The Conference Board Supply Chain
Council and The Conference Board Functional Excellence and Shared
Business Services Council in the Asia-Pacific region. As a management
consultant in shared services for the past eight years, he has assisted
several companies in Asia-Pacific and North America review the
effectiveness of their supply chains and other business support functions
and implement shared services. Prior to becoming a management
consultant in 2002, Suri was vice president, shared business services,
for BHP Billiton in Australia. He also held several senior positions in M&A,
customer service, purchasing and materials management, network
services, network asset management, and shared services during his
26 years at Ontario Hydro in Canada. Suri is a doctoral degree candidate
in shared services at the University of Twente in the Netherlands.
About The Conference Board Asia-Pacific
Supply Chain Council
This council provides supply chain decision makers in the Asia-Pacific
region with a network of professional peers who meet regularly to
exchange ideas, best practices, and innovations related to the supply
chain and logistics functions.
About The Conference Board
The Conference Board is a global, independent business membership
and research association working in the public interest. Our mission is
unique: to provide the world’s leading organizations with the practical
knowledge they need to improve their performance and better serve
society. The Conference Board creates and disseminates knowledge
about management and the marketplace, conducts research, convenes
conferences, makes forecasts, assesses trends, publishes information
and analysis, and brings executives together to learn from one another.
The Conference Board is a not-for-profit organization holding 501 (c) (3)
tax-exempt status in the United States.
About The Conference Board Council Program
Membership in one of our councils affords entrée into a select and
trusted community of 2,500 executives from a broad array of industries,
functions, and regions—executives who know the value of this rich
source of insights and new approaches. Enduring relationships are
the cornerstone of the Councils experience. Enhanced by our global,
enterprise-wide reach, these relationships span the world and extend
value across your organization. Confidential peer dialogue combines
broader perspective, specific knowledge, and shared experience to
save you precious time and public missteps.

Council Perspectives™
To learn more, contact Alice Lee, council manager, Asia councils:
Members of The Conference Board Councils are among the most experi- +(852) 2804 1029 or alice.lee@conference-board.org.
enced and savvy executives in the world. Their private deliberations pro-
duce rich insights on the most challenging business and societal issues Council participation is by invitation only and is an exclusive benefit
of our time. With their permission, we have channeled their energy and for The Conference Board member organizations.
expertise into Council Perspectives, a new platform to voice their views.
Council Perspectives are based on sessions from selected council meet-
ings, post-meeting interviews, and other pertinent data, and may some-
times include original content written by council members. It is not
intended to be a research report; rather, Council Perspectives provide
a unique look into the minds of executives from leading global organiza-
tions as they assess, analyze, and develop ways to address critical issues.

To download this publication free of charge, visit www.conferenceboard.org

Public relations contact:

Frank Tortorici, +1 212 339 0231 or frank.tortorici@conferenceboard.org

To become a member or inquire about membership with The Conference Board call:
Americas +1 212 339 0345
Europe, Middle-East, and Africa + 32 2 675 5405
Asia-Pacific + 852 2804 1000
South Asia + 91 9987548045

Council Perspective CP-021 © 2010 by The Conference Board, Inc. All rights reserved.
The Conference Board® and the torch logo are registered trademarks of The Conference Board, Inc.